Has the stock market had it? Is the economy giving out?
After a wild ride on Wall Street, and the promise of more turmoil ahead, investors need answers to some knotty questions.
Naturally, no one has the answers. But Chicago’s business community is loaded with folks who have a definite point of view, from veteran trader Patrick Arbor, who sees smooth sailing ahead, to super-bear Henry Van der Eb, who is loading up on gold stocks that stand to rise when all else falls.
One bottom line is clear: uncertainty. For years, when the market sank, investors jumped in to buy on the dips, propelling the stock market ever-higher. These days, with corporate earnings under intense pressure and technology stocks flagging, some believe the good times have run out of gas–literally, considering how trouble in the Mideast has sent energy prices soaring.
This week, Tribune staff writers tracked down local experts to address the big questions on everyone’s mind at a critical juncture in America’s long-running era of prosperity.
Q: Has the stock market seen its best days?
For years, money manager Henry Van der Eb bet against the stock market rally. Now, finally, he feels vindicated.
For perennial bear Van der Eb, manager of the Bannockburn-based Gabelli Mathers Fund, the latest collapse in Nasdaq stocks confirms that “the technology bubble clearly has burst.”
“At the end of the day, there is nowhere to hide,” he said.
The market will have trouble bouncing back, he predicted: “The danger for the market is that now people are selling off what they thought were safe holdings, simply to cover their other losses.”
So Van der Eb is following his bear strategy to its logical conclusion. No picking up tech stocks on the cheap for him, he said. Most of his fund’s assets are stashed away in short-term Treasuries and money market securities.
Just one sector of the market appeals to him. It’s a group that has performed horribly during the good times of the past two decades, but stands to gain if the economic equivalent of Armageddon strikes: Van der Eb is buying gold-mining stocks.
— William Sluis
Q: Will higher energy prices cripple the economy?
Tight oil supplies and Mideast violence have sent energy costs skyrocketing, raising fears of inflation, which, in turn, could cripple the economy–right?
Nah, says Anil Kashyap, economics professor at the Graduate School of Business at the University of Chicago.
The steep prices for everything from jet fuel to natural gas might trigger some inflation, squeeze some profits and slow the economy somewhat.
“But it’s quantitatively implausible that oil prices at the level they’re at now will crush the economy,” Kashyap said. “They can remain high and rise further without doing that much damage.”
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Consumers worried about those heating bills and sticker shock at the gas pump can ease their minds about macroeconomic concerns, he said.
“They shouldn’t worry,” he said. “Be happy.
“If [prices] doubled again, that would probably be something of a problem … but nobody’s forecasting them to rise nearly as much as they already have. We’ve probably already seen most of what’s going to happen.”
— Lauren Comander
Q: Does the presidential election matter for the economy?
Whether it’s Vice President Al Gore or Texas Gov. George W. Bush, whoever takes over the country in January no doubt will have an influence on the course of the economy. But like the election itself, the potential impact of one versus the other is too close to call, said Pamela Strobel, executive vice president of Unicom Corp. and its chief subsidiary, Commonwealth Edison Co.
“I wish I had a good answer,” Strobel said.
The traditional view holds that a Republican president would be “better for the economy,” particularly if the House and Senate stay in GOP hands as well, she said.
“But when you look back at the last eight years, in terms of just the economy, we’ve probably had the right mix of leadership in the House and Senate combined with a Democratic president,” she said. “And maybe that tells us a story that we need the balance of power.”
Although Strobel identifies herself as a Gore supporter, she admits some discomfort with the Democrat’s attacks on big business: “The more he tempers his own speeches with the bad, big drug companies, the bad, big oil companies, the bad, big corporations, that sends a bit of a tremor down the [corporate] spine.”
— Tim Jones
Q: Are most dot-coms doomed?
Now that investors have embraced irrational depression rather than irrational exuberance in regard to the Internet, the dot-coms are heading for a rough year or two of drastic consolidation, says John Rau, former chief executive of LaSalle Bank, who now advises venture capital funds.
Investor distaste for Internet start-ups was predictable, Rau said, because it mirrors what happens periodically with several other investments, including real estate investment trusts.
“When you have a sector that’s illiquid, where the gains come from appreciation rather than bookable earnings, the market gets overly optimistic and that sector gets hot,” Rau said. “When the market discovers that appreciation is hard to get a handle on, it tends to run away from the sector and oversell. That’s happened two or three times in the last 15 years with real estate, and it’s happening now with the Internet.”
For the next few years, cash will be king for Internet firms, he said. Those with money will survive and probably acquire some that are tapped out. “This is still an enormously big thing that’s reshaping our economy,” Rau said.
— Jon Van
Q: How bad is the falling euro for multinationals?
For auto-components manufacturer BorgWarner Inc., business is booming in Europe, but profits aren’t.
“If we were a German company, I’d be telling you how wonderful things are,” Chairman and Chief Executive John Fiedler said.
Alas, like other U.S. multinationals, BorgWarner converts its euro sales into dollars. “That’s when I lose,” he moaned.
The dollar, of course, is extremely strong compared with the joint European currency. That makes imports cheap for U.S. consumers, so European automakers such as Mercedes-Benz, Renault, Peugeot and Volkswagen are busily churning out cars to export to the U.S. market. And they’re buying lots of the components made at BorgWarner’s European factories. But those sales are denominated in euros and, when converted into dollars, what had been a solid profit suddenly turns slim.
BorgWarner warned investors a month ago that currency issues were crimping earnings for the third and fourth quarters. But Fiedler, who thinks that “probably the euro isn’t undervalued so much as the dollar is overvalued a little,” hopes conditions will ease in coming months.
“You can’t really predict currency moves,” Fiedler said, “you make a guess for budget purposes.” At the start of 2000, BorgWarner was expecting the euro to be worth about $1.05, but in recent weeks it has been hovering around 87 cents. And Borg’s best guess for next year? Maybe 95 cents, Fiedler said.
— James P. Miller
Q: Where’s the Fed pointing interest rates?
Patrick Arbor puts his faith in technology.
It is changing the way cars are made, the way traders work at the Chicago Board of Trade–which he once chaired–and even the way interest rates swing.
Arbor is among those who believe that technology has so improved productivity that it will save the still-growing economy from the ravages of inflation and its Federal Reserve-appointed partner: interest rate increases.
“Until we see signs of excessive wage or price increases, I believe the Fed will probably hold steady,” Arbor said, adding that it has been a “phenomenon” of technology that those signs have not appeared already, considering the low level of unemployment.
Another factor that should keep the Fed from raising rates is disappointing corporate profits. Such shortfalls often signal the onset of a recession, which also would encourage the Fed to stand firm, he said.
Still, Arbor expects profits to rebound from the current spate of disappointments, especially as companies exploit–you guessed it–new technologies. Wireless companies in particular have a spectacular future, he predicted: “Technology will carry us forward.”
–Melissa Allison
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Q: Are cell phone sales slowing for good?
Even though warnings of weaker-than-expected cellular phone sales prompted investors to dump Motorola Inc. shares last week, Mike Zafirovski sees plenty of growth ahead.
The 46-year-old Zafirovski, who took over the Schaumburg-based company’s cell phone division in June, says he’s certain the rough waters roiling cell phones at the moment–not to mention computers, chips and a host of other electronic devices–will be calming down soon.
“This is just a small course correction,” said Zafirovski, who came to Motorola after a 24-year career with General Electric. “I’m absolutely confident that in the very, very near future, those business models will be refined and the growth and the customer experience will rebound very strongly, as early as 2001.”
Zafirovski said the challenge for handset manufacturers, especially those making Internet-ready phones, is to produce devices that are easy to use and include features people on the move want, such as instant messaging.
“We had to some extent underestimated the level of simplicity those devices would need to have and the content people want before they start to buy and use them,” he said.
— Rob Kaiser